Contractors, there's still time to score this ISA season
When football teams look to strengthen their squads in the January transfer window, there is always a last-minute dash to make final bids.
Likewise, in the run up to the end of the tax year, popular Individual Savings Accounts move even more centre stage as contractors rightfully seek to make the most of their annual allowance before it’s too late, writes Tony Harris, an IFA at ContractorMoney.
The beautiful (ISA) game
Just as the costs of players soar in the run up to the close of the transfer window, so in the world of personal finance the end of February/early March signalled the start of what has become known as ‘ISA season.’ This is the time when providers competed to offer the best cash ISA rates to capitalise on the end of tax year rush.
Traditionally, providers would offer tempting rates to entice savers but unlike the salaries of key players that seem to go up and up each season, in recent years the cash ISA season has been an anti-climax, as rates have failed to excite.
The Premiership struggles, the Championship stimulates
Like the beautiful game, the cash ISA market has long been dominated by the larger, ‘Premiership’ providers, including Halifax and Santander. But the rates available from these top players remain stubbornly low and, unfortunately, ISA season has done little to spur these providers to improve their rates.
However, climbing the ranks in the financial equivalent of the Championship league have been many of the smaller providers, and we are seeing a definite shift from contractor clients towards local banks and building societies, because they are offering the greatest returns.
The market’s hottest deals
Stafford Railway Building Society is offering 1.75% on their easy access cash ISA which matches that by Britannia and Nationwide. Next best on the ISA league table is National Counties Building Society, offering 1.65% on deposits over £100, similar to up and coming ‘challenger bank’ Metro, offering the same rate on deposits over £1.
Why it can pay more to support locally
Many of the building societies are focused purely on a local client base and offer higher rates to those in their vicinity because they have more of a ‘duty of care’ to their communities rather than shareholders. This preferential treatment you can receive if you ‘go local’ as a would-be ISA customer has been confirmed by research from Savings Champion. So small -- and local -- often means beautiful. Indeed, at the time of writing, Dunfermline, Cheshire and Derbyshire building societies are all offering 1.60% on deposits over £1, which puts their ISAs in line with Nationwide’s Easy ISA.
Keep your eye on the ball
If as a contractor you’d like to have cash savings to hand for a rainy day, then it is important to review your ISA regularly in order to ensure you are getting the best return on your investment. Always read the small print so you know when the headline rate will drop. And remember, if your current cash ISA is no longer competitive then you can transfer it to a new cash ISA -- or an Investment ISA. This transfer can be achieved without losing any of your tax-free growth -- you just need to complete the ISA transfer paperwork supplied by your provider.
Time to fix the game?
The best rates available on cash ISAs are fixed for between two and five years, as such providers are willing to offer higher returns for the added security of holding your investment for a fixed period. For example, Skipton Building Society is offering a five-year fixed rate at 3.00% on deposits over £500. But if you are not willing to leave your investment in a fixed account for that length of time, then Britannia offers a 2.05% rate fixed for two years on deposits over £1.
'The referee’s a Banker!'
The question that contractors wanting success in the ISA market must ask themselves is whether now is the right time to fix. Unlike homeowners, who are hoping that interest rates won’t rise and increase their mortgage repayments, savers are hoping for the opposite to happen. While Mark Carney, governor of the Bank of England, has stated that the base rate is unlikely to rise this year, the industry is anticipating that this could all change in 2015. Bear in mind, if you have fixed ISA at 3.00% for five years, then your savings won’t benefit from any increase in the base rate which could make a huge difference to your potential returns over the next few years.
Time to switch sides?
A true footy fan will follow their side regardless of the team’s fortunes but investors need to be more mercenary.
With inflation currently sitting at 1.9% (January 2014), even the best buy instant access cash ISA rate of 1.75% isn’t keeping pace with inflation, which is causing many contractors to review their investment portfolios.
If you are hoping to achieve better returns from your savings then maybe the time has come to switch allegiance. Don’t forget, an Equity ISA typically offers the potential for far higher long term returns to investors.
Yet as with all investing, contractors should be mindful of their individual attitude to risk when selecting funds for an Equity ISA. This means you should review your asset allocation regularly to ensure the investment is performing in line with your expectations.